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Money Supply, Inflation and Economic Growth: An Empirical Study - Essay Example
Author : flossie64
Pages 7 (1757 words)
There has been a lot of research in recent years with the intention to examine the relationship between inflation and economic growth. Many models have also been formulated to examine the relationship between money supply and inflation. However, there is still no evidence of a clearly defined empirical relationship that can be derived between inflation and growth…
In some cases, there is a lack of any evidence of any relationship between the three factors. Many empirical analyses have been conducted to come to a definite conclusion. But it is still elusive. Some of the conclusions arrived at regarding this relationship through empirical studies are discussed in this paper.
The argument that inflation promotes economic growth has been mainly put forward by Felix (1961), Seers (1962), Baer (1967), Georgescu-Rogen (1970), and Taylor (1979, 1983).(Paul et al 1997 pp.1388) These analysts base their argument on two streams of thought. The first is derived from the Keynesian theory, which propounds that in economies with sluggish real wage adjustment, inflation can increase the rate of return on costs, and redistribute income away from workers, who have a lower propensity to save, to entrepreneurs who exhibit high propensities to save and invest. This redistribution in favor of entrepreneurs results in an increase in rate of economic growth. The other theory, which exhibits such a relation between inflation and growth, is the quantity theory of money. In an economy with flexible prices, inflation tends to redistribute wealth from the holders of cash balances to monetary authorities through the instrument of tax. ...